February 2009 Archives

...comes from the editorial page of the Notices of the American Mathematical Society.

Global Crises from the Perspective of Complex Adaptive Systems

It's one page.  Rather than summarize or take a quote, I encourage you to just read the whole thing.  It helps to know a little about complex adaptive systems.  There are are a few things in there that will resonate with economists quite generally.

The Wall St. Journal Real Time Economics blog asked a number of economists what people should do with the average $8/week reduction in taxes withheld from our paychecks.

One fun game to play is to try to guess how each economist would respond.

Some of them took it seriously, I think.  Here are some highlights.

Justin Wolfers gets the award for the fundamentalist Keynesian response.

Justin Wolfers, The Wharton School: Find a cash-strapped soup kitchen. If they are looking at having to make cutbacks, then your $8 donation really will yield $8 worth of extra soup purchases. A good Keynesian will point out that this $8 in extra spending will enter the circular flow, creating the much-needed economic stimulus. (By contrast, university giving may simply prop up a sagging endowment.) But more importantly, the $8 you spend helping the hungry really can have a big bang-for-the-buck at a time when food spending is plummeting and unemployment rising.

Mr. Cliggott and Mr. Kasriel must have thought the question was asking what you would do with an extra $8 million.  I'm not aware of too many venture capital investments or hedge funds that require just $8.

Doug Cliggott, Dover Investment Management: You should invest it, not consume with it. Preferably a venture capital investment that will have a significant multiplier effect. This is why tax cuts are the worst type of stimulus. They are usually consumed or invested in a secondary market with little or no multiplier.

Paul Kasriel, Northern Trust: I would use the extra cash to start a hedge fund, which would purchase newly-issued asset-backed securities. I would finance my position through the Fed's TALF program.

Ricardo Reis and Alan Blinder get the De Gustibus Non Est Disputandum Award for their answers.

Ricardo Reis, Columbia University: You should use the money in the way that is best for you and your family, whether that is saving or spending, buying this or paying that. Doing what is in your best interest usually leads to doing what is best for the economy. (And when it is not, the economic policymakers should have figured that out when deciding whether to, and how to, give you the $8, so that by pursuing your best interest you end up doing what is best for all.)

Alan Blinder, Princeton University: While I might have my own personal favorites, each citizen should spend the money on what he or she sees fit. The idea is to get more spending, more jobs, higher incomes, etc. in the nation's economy.

Martin Feldstein answered it like an exam question.  I give him an "A".

Martin Feldstein, Harvard University: I don't think individuals make spending decisions based on attempts at good citizenship. If they think this $8 is a permanent increase, they will add it to their overall budget. More likely, they will recognize that this is temporary and will use it to pay down debt or add to their liquid assets

Guessing Greg Mankiw's response is left as an exercise for the reader.  Hint:  He implicitly assumes that you'll save up a couple months worth of your $8/week.

And finally, the cleverest response was from the always clever Tyler Cowen.

Tyler Cowen, George Mason University: In my view, fixing the banking sector is more important than getting the stimulus right. So if you can afford to lose the money, go to a large bank (more likely to be insolvent), find their most overpriced service, and buy as much of it as you can. That way you are doing your part to recapitalize our banking system.

If you're stuck for ideas, just keep on using ATM machines, owned by other banks, so you can pay large fees to take out small sums of money from your checking account. When you need to, take all of your withdrawals and deposit them back in the account once again and start all over with the process.

Honestly, Letterman should have 10 of these economists record their answers for his top 10 list.  I would love to see a straight-faced Tyler read that as the number one thing to do with your $8/week stimulus.

What would I do?  I like Reis's and Blinder's answers as a general principle.  In fact, had I been asked, I might have said "whatever you want."  Why waste words?

Go read the other responses.

Oh, and it goes without saying that the WSJ readers have at it in the comment section.  Enjoy.

Let's take a moment for a little fun and frivolity.  Well, if you're a computer geek, that is.

Tomorrow (Friday) night, the clock on your Unix system will reach 1234567890 seconds after January 1, 1970 (the beginning of the Unix epoch).

From Wired:

Unix weenies everywhere will be partying like it's 1234567890 this Friday.

That's because, at precisely 3:31:30 p.m. Pacific time on February 13, 2009, the 10-digit "epoch time" clock used by most Unix computers will display all ten decimal digits in sequence. (That's 6:31:30 Eastern, or 23:31:30 UTC.)

So log in to your Unix system a few minutes ahead of time to get your watch synchronized and get ready to go.  Then type in the following command at the shell prompt.

date +%s

Kind of like watching the odometer on the old family car.

One of the small joys of living in west central Illinois is that nearly every town you visit has a connection to Abraham Lincoln.  Stories occasionally appear in newspaper columns by local historians.  Some stories are apocryphal; others substantiated by documentation.  Families who have lived in the area since Lincoln's day pass down stories through the generations.  Buildings have plaques saying that Lincoln slept here.  Signs mark the spots where he gave speeches or debated Stephen Douglas.  In any of the many town squares throughout the area it is easy to imagine the young lawyer taking a break to rest his horse and read a book.  A visit to historic New Salem shows you how he lived before moving to Springfield.  His speech at Peoria contains precursors of the "House Divided" speech.  Just south of here, in Beardstown, is the only courtroom from Lincoln's time that is still used as an active courtroom to this day.  A new modern presidential library and museum tells his story to the next generation.  Finally, a visit to his tomb in Springfield is a profoundly moving experience.

Lincoln history is alive and well here.

I invite you to join in a reading of the Gettysburg Address this morning at 9:30am Central Standard Time.  The Abraham Lincoln Presidential Library and Museum is webcasting the event.  Take a moment to remember and connect with history.

Fourscore and seven years ago our fathers brought forth on this continent a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure.  We are met on a great battlefield of that war.  We have come to dedicate a portion of that field as a final resting-place for those who here gave there lives that this nation might live.  It is altogether fitting and proper that we should do this.

But, in a larger sense, we cannot dedicate...we cannot consecrate...we cannot hallow...this ground.  The brave men, living and dead, who struggled here, have consecrated it far above our poor power to add or detract.  The world will little note nor long remember what we say here, but it can never forget what they did here.  It is for us, the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced.  It is rather for us to be here dedicated to the great task remaining before us...that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion; that we here highly resolve that these dead shall not have died in vain; that this nation, under God, shall have a new birth of freedom; and that government of the people, by the people, for the people, shall not perish from the earth.

Bill Conerly raises an interesting question on his blog, Businomics, today.

A good question asked yesterday: Is this recession different from others in degree or in kind?  No recession hits the historic averages smack in the middle, so this one would have to be at least a little different in degree of severity or duration.  But might it be fundamentally different from the types of recession we've seen in the past?

...

Now we are in a bust and we hear "This time it's different."  Those are the most dangerous four words in economics.  I don't think this recession is different.  Oh, it's different in magnitude and duration, it's different in the specific combination of factors that led to the recession, and its different in the level of panic that policy-makers have expressed.  But the fundamental process of recession and recovery?  I think it will prove to be pretty much like the rest.

I wholeheartedly agree that the words "This time it's different" are some of the most dangerous words in economics.  Like Conerly, I'm trying to make the case that it's not all that different.  In fact, in my comments to this post, I converse with my readers about some of the ways that this is just nothing like a Great Depression and that it is more like pre-1990s recessions.

Also, while we're on the subject of trying to communicate about the recession, the stimulus, and other matters to the general public, here's an observation.  Non-economists (including politicians) tend to fall into two camps regarding the stimulus.  One camp maintains that we have to act quickly to create jobs building roads and bridges because this is the worst recession since the Great Depression and if we don't do something quickly we'll be in another depression.  The other camp says government is too large, so cut taxes.

I am not finding much in the way of middle ground.

Mark Thoma also suggests that opposition to the stimulus is driven by opposition to big government rather than belief in small multiplier.

I think that much of the discussion in the economics end of the blogosphere has been a little more nuanced.  I imagine that there are a lot of economists out there who acknowledge that the spending will have some multiplier effect, but that the efficiency of that spending may leave a lot to be desired.  Those of us that are predisposed to that sort of thinking may then also get our hackles up a little when we think about how some of the spending creeping in could come with a lot of strings attached that might actually stifle growth.

It's not different this time.

For as long as I can remember, I have heard pundits say that the American economy is in decline for one reason or another.  Depression has always been right around the corner.  Such predictions sell books.  So the fact that there are some people who are predicting complete collapse of Depression-like proportions is not surprising.  Those undercurrents have been with us for the last few recessions.  It's not different this time.  But by the same token, this recession is not the beginning of a prolonged decline in the long upward trend of economic growth.  At least, it does not have to be.

The U.S. economy is always in a state of flux--dynamic and ever-changing.  We face challenges today.  But so has every generation, and some of their challenges were much more serious.  Things are not perfect.  We have kids going to school in 100 year old buildings.  Access to broadband Internet lags behind Europe.  I could go on.  Government can and should take on these challenges, but not for the sake of short-term stimulus.  Take on the challenges that will lead us to a more dynamic and prosperous 21st century economy.

When we conflate the short-term stimulus with the long-term dyanamism of growth we get confused policy that does not serve our citizens well.  Further, we run the risk of constructing policies that are so ill-advised that we could end up slowing our growth.  It does not have to be that way.

I admit to being at a loss as to how to solve this problem.  Only a proper understanding of the economic history of this country will open people's eyes to what is happening.

Only a proper understanding of economic history will make people realize that it's not different this time.  Where we go from here depends on that understanding.

After writing these two rather more lengthy than usual posts, I read Brad DeLong.  Though DeLong and I disagree on a few things, I have always found him to be very reasonable on the things that really matter in economics.  To wit:


It is a bit of depressing news, but then I was already expecting that the next revision of GDP might show it a little lower.  So I can't say that I'm incredibly surprised.  And remember, I'm not saying that a fiscal boost would be a net negative.  Whatever the present plan does to shore up GDP will be appreciated.

But I'm still a skeptic.  And Brad himself said that's ok a few days ago!

Arnold Kling feels lonely and unloved:

I'm feeling somewhat lonely these days. My understanding of macroeconomics is closer to that of Paul Krugman, Mark Thoma, and Brad DeLong than it is to that of Robert Barro, John Cochrane, or Eugene Fama. And yet I am a stimulus skeptic...

It's fine to be a stimulus skeptic! But stimulus skeptics need to be stimulus skeptics for reasons that are (a) theoretically coherent and (b) empirically relevant. To be a stimulus skeptic because you fear that the bill that emerges from congress will have a very low bang-for-buck, or fear that the long-run drag from amortizing the extra debt will cost us more than we gain from the short-run fiscal boost.

I'm a little from column A and a little from column B.  Mostly I question the bang-for-the-buck, as I explain at length in the previous post.

I'm just trying to puzzle out in my head how the present stimulus package will materially affect the trajectory of this chart.  And I'm just not seeing it.

This is continued from part 1.

We are in a recession.  This is a more serious recession in many ways than the last two.  However it is far from the proportions of the Great Depression, and the constant comparisons are beginning to wear on me.

This fall I gave a couple of public talks on the economic situation.  This was before it was announced that the recession began in December '07.  I told my audiences that I did expect that a recession date would be announced soon and that the start date would be between December '07 and July '08.  But I was also very quick to point out that although the job losses were already substantial, this was nowhere near the level of severity of the Great Depression.  Furthermore, the lessons that we learned from the Great Depression would be key in preventing something like that from ever happening again.  Of course, monetary policy is just about tapped out (barring some more drastic maneuvers) having already done what it can to prevent an even more serious failure of the financial market, so this brings us to fiscal policy.

Do we need $800 billion in spending to keep another Great Depression at bay?

Opinions among economists vary widely concerning the stimulus.  There are those who support it because they believe it will work (the multiplier is significant) and are not philosophically against larger government.  There are those who oppose it because they are philosophically against larger government and therefore the size of the multiplier does not matter (though many of them suspect that the multiplier is small and therefore use that as a supporting argument).

There are those who support tax cuts as stimulus because they support tax cuts all the time.  There are those who oppose the tax cuts because they believe consumers will save rather than spend them.

You need a scorecard to sort it all out.  We are not speaking with one voice.

This post is already getting too long to get into all of the problems with macro.  Besides, Arnold Kling is all over that.  While I don't necessarily agree with everything he says, I have enjoyed following his comments. 

It will suffice to say that macro folks have some work to do.  This is an exciting prospect because it was the inability of macro to answer many of these questions (and the debates that raged as a result) was what captured my attention and made me want to study this crazy stuff.

As for the stimulus package itself, I am a little disappointed.  I have my doubts about the size of the multiplier, but am willing to listen to evidence.  And while I'm cautious about increasing the size of government, I accept that there is a place for government in the economy.  But while watching the cable talk shows last night, the real reason for my skepticism bubbled to the surface.

Everyone is saying how the stimulus is going to "create jobs".  After all, job losses are the big story right now.   But will this stimulus actually create jobs?  Are we in a position to make this work?  Before you scoff, consider this:

The Federal Highway Administration has warned the state agency its payroll might be too depleted to handle the monstrous load of projects that a proposed $800 billion federal stimulus package could drop on Illinois' doorstep.

...

The Highway Administration is particularly concerned about professional positions such as engineers.

Good grief!  Has it not occurred to people that building roads and bridges is different in 2009 than it was in 1932?  Even minor projects need engineering support all the way from inception to completion.  How much of the $800 billion will go for that?  Do we have enough engineers to support that?

Then there is the fact that at the present time many of the layoffs I'm hearing about are temporary.  Unlike the last two recessions where plant closings and outsourcing were major factors.  I'm not hearing about plant closings and outsourcing this time.  Extensions of unemployment benefits and education tax credits would seem to be a reasonable way to address this.  I'm not sure a big construction push is the optimal way forward here.

Infrastructure and energy policy are laudable goals, but are they the way out of this recession?  I don't believe so.  My disappointment with the stimulus package and much of the debate around it in the media (as opposed to the professional debate among economists, which is of a higher quality) is that so many people think that building roads, bridges, and solar panels is the way to fight the recession.  That just doesn't wash.

The tax cuts will be saved rather than spent.  A lot of money will go to projects with questionable social value.   But yes, taken as a whole, the package will probably cushion the downturn somewhat.

And so once again, I am frustrated by the fact that this stimulus is being identified so closely with job creation.  I just don't think that in the final analysis there will be a lot of bang for the buck in terms of job creation, certainly not this year--which is when we really would need it.

Will it keep GDP from falling more than it would otherwise?  Sure it will!  Even a conservative estimate of the multiplier would concede that.  This bill is around 5% of GDP.  Even spread out over several years it will be felt.  But is it the right spending at the right time?  That is less clear.

I don't find anything in the bill that I believe is truly necessary to prevent a Great Depression scenario.  But could you argue that this amount of spending (on something, anything) is needed to shore up GDP?  You could argue it.  You could even argue that because of policy lags we need it now just in case the bottom falls out next year.  I'm skeptical but not dismissive.  I do believe that a certain amount of fiscal stimulus is a good insurance policy at a time like this, but I also suppose that I wouldn't be happy with any outcome of this political process.  So be it.

And that's the problem of fiscal policy in general.  Politicians like to believe that they can write legislation and create jobs.  It's not as simple as that.  There are no free lunches... no matter which party is in the big chair.

When the wheels started to come off the financial markets in September, I contended that swift action was necessary.  The Fed, for its part, did well in doing what it could within the bounds of its mission to prevent a complete collapse.  But the Fed was running out of options that were feasible for it to do on its own.  It was time to bring in the Treasury, and by extension, Congress.  I was not overly optimistic, but stood behind the effort.  I believed then, as I still do today, that if no legislation had been passed the probability of a further chain reaction in the financial markets during the presidential transition would be greatly elevated.  And the consequences of that would be potentially quite severe.  A legislative measure brought with it a measure of confidence during that transition.

$700 billion is a lot of money.  It's too much to risk letting go to waste, and still not enough to cover all of the potential losses out there.  Given the problems encountered so far, I believe it is prudent to slow things down.  We need triage.  Put the remaining TARP money where it will do the most good at preventing counterparty failures rather than frittering it all away on things of questionable value and purpose.

Yeah, right.  That's easier said than done now.  But no matter--buckle down and do the hard job.  Continue to let the market unwind.  The TED spread is way down from October, which is one sign that things are working themselves out.  There will be some more pain on Wall Street.  Accept that as inevitable, and do not prolong the inevitable.  Walking the fine line between preventing counterparty failures and not prolonging the inevitable pain is Mr. Geithner's job.  I think he's well equipped to walk that line, but the jury will be out for some time.

Now comes the fiscal stimulus.  This post is already getting long, so let's address that in part 2.

The BLS reported today that 598,000 nonfarm payroll jobs were lost in January and the unemployment rate climbed to 7.6%. No one is surprised by this.

For anecdotal evidence, as I move around the region listening to and reading the local news, I am hearing more stories of what seem to be classic demand-driven layoffs. The ripple effects of the housing slowdown and the global demand slump are being felt in more places than they were 6 months ago.

Nearly 600,000 jobs lost sounds like a lot. Certainly, we haven't seen those kind of absolute numbers for a very long time. However, the labor market is much larger than it was in past recessions. So let's go behind the numbers and look at the job losses as a percentage of total employment.

Let me be very clear about the methodology behind these charts. I am calculating the cumulative net job losses during all post-war recessions as a percentage of peak employment near the start of the recession. In some cases, employment dipped slightly and rose again before taking a larger downturn. In those cases, I considered the peak to be the month before the larger downturn.

Though all of these downturns are associated with NBER recessions, not all of the peak employment dates coincide exactly with NBER business cycle peaks. (For example, the NBER dates a business cycle peak in November 1973, but employment did not turn down until July 1974, so I used the July 1974 date for this chart.)

As an example, employment peaks in July 1953 at 50,536,000.  Thirteen months later, in August 1954, a total of 1,711,000 jobs were lost, which was about 3.39% of peak employment (dark green line). 



It is a fairly busy chart, but we can see the current recession (orange) is very similar to the 1981 recession (light green) in terms of job losses as a percentage of peak employment. But we have had sharper downturns in percentage terms.

If you believe that this recession is not fundamentally different from other demand-driven post-war recessions, then a forecast of job losses continuing for another 6 to 9 months would not be out of line. Furthermore, looking at past cycles, one would expect it will be at least a year (possibly more if the recovery looks more like that after the 2001 recession) before employment reaches the previous peak. Personally, my expectation is that it will take 18 to 24 months (from now) to get back to the previous peak.

Finally, here's a version of the chart with the last four recessions (including the current one) that is a little less cluttered.  I've also included the 1957 recession as an example of a sharper downturn in payrolls.

UPDATE:  Spencer at Angry Bear looks at household survey (CPS) data and concludes that the current downturn is the worst in the post-war period.  Actually, according to the household data the 1953 recession is worse, but that's a minor point.  But there is another issue to consider.  I'm not sure what to make of the fact that the household survey is subject to less variation (in both directions) than the payroll survey, especially during the '70s and '80s.  It is widely acknowledged that the household survey is a less reliable indicator of the labor market overall than the payroll survey.  So I am understandably nervous about the possibility of understating the severity of the employment declines in the '70s and '80s if we were to rely on that data.

So I'm working along and come upon a minor little computing issue, the details of which are not important.  Though minor, it ground my work to a standstill until I could resolve it.

I typed 4 words into Google, clicked the second link, and had the answer in seconds.  Though the fix was very sensible in hindsight, it would have taken me a while to figure it out.

In an unrelated matter, I've been reading articles on JSTOR tonight from the comfort of my basement office.  A few years ago, such research would have required a trip to the journal stacks and potentially a visit to the interlibrary loan office.  Though I still visit the brick-and-mortar library quite often (I love university libraries), it is nice to have the option late on cold winter nights.

50 years ago today the music died.

We lost some tremendous musicians that day:  Buddy Holly, J.P. Richardson, and Ritchie Valens.  Fortunately, the good folks at the Surf Ballroom in Clear Lake, Iowa are making sure that we'll never forget.  The Rock and Roll Hall of Fame and Museum last week named the Surf Ballroom as a historic rock and roll landmark.  Last night, they commemorated the last concert that Holly, Richardson, and Valens would ever play with a star-studded event.

I wish I had been there.

Holly, in particular is increasingly being remembered for the genius that he was.  The Beatles and the Rolling Stones were influenced by him.  His music lives on.